Taiwan
Changes More Important Than US Policy?

You
can make a case that while Taiwan is mentioned often as a key player in US-China
relations, relatively little current reporting is done about the island itself.
That’s the impression I got from talking with Ambassador John R. Malott,
a retired career diplomat who is currently President of the World Affairs Council
of Orange County. Mr. Malott visited Taiwan in May along with 10 other WAC leaders.
He reported to our local council in late June and I talked with him a bit afterward.

John
noted that while Taiwan is the United States’ 7th largest trading
partner, Yahoo had not updated its economic coverage site on Taiwan in six months
at the time he made the trip, and that during that time economic problems had
been building in Taiwan. "Academics and foreign policy pundits focus on China
and tend to think of Taiwan only as an appendage of that ‘Big Picture,’"
Malott said. "Their framework for analysis is the Shanghai Communiqué of 1972
– to which Taiwan, of course, was not a party – and they seem oblivious
to the major political, economic, and social transformations that have taken
place on Taiwan."

DEMOCRACY
IN GRIDLOCK

Malott
says that democracy is alive and well in Taiwan, but that, as usual, it is a
messy business and that the system seems to reflect fairly accurately some deep
divisions within the body politic. Taiwanese President Chen Shui-bian was elected
in March 2000 as the candidate of the Democratic Peoples’ Party (DPP)
after decades of virtual one-party rule by the Kuomintang (KMT). The peaceful
transfer of power to an opposition-party winner was an important moment in Taiwan’s
history, but it has led, more than a year later, to something resembling political
gridlock.

The
DPP, Malott believes, "has no more experience in governing than the KMT has
as an opposition party." His impression, after talking with numerous people
on the island, is that the DPP hasn't learned much in a year about how to govern
effectively and that it "seems short on talent, especially in the economic area."
There will be legislative elections in December that might or might not sort
out the political landscape with more clarity.

Although
the DPP holds the presidency, the KMT still holds the legislature.

The
KMT, Mr. Malott believes, will appeal to the "mainlander" vote on the island
in an effort to win back members of the Peoples’ First Party, formed by
KMT dissidents, and remind Chinese that the economy was in better shape when
the KMT ran things. But most of the observers he talked to expect the KMT to
lose its majority in December, with President Chen counting on yet another split
in the old KMT ranks.

But
even a partisan realignment is unlikely to break the governance gridlock in
Taiwan. The divisions about the island’s future are too deep, unless an
unexpected dose of inspirational leadership emerges.

ECONOMIC
DOLDRUMS

Meanwhile,
the Taiwanese economy, for so long one of the wonders of Asia and the world,
is in trouble. In the first quarter of 2001 the economy grew at its slowest
pace in 26 years. Unemployment has almost tripled – from 1.5 percent to
4 percent, which is low enough by world standards but much higher than Taiwan
is accustomed to. Exports could decline by 5 percent this year. Malott notes
an estimate that some 15 percent of all bank loans are non-performing, but nobody
wants to talk about it or do anything about it.

While
the downturn in the US economy has played a role, longer-term trends are at
work. Taiwan’s manufacturers are shifting production to lower-wage Asian
countries, notably to mainland China. Of Taiwan’s 80,000 manufacturers,
24,000 have plants in the mainland. Some 300,000 Taiwanese managers are now
working at Taiwanese subsidiaries on the mainland. About 30 percent of Taiwan’s
production of semiconductors is likely to be done on the mainland by the end
of this year. "Some Taiwanese businessmen say they find it easier to do business
there than at home," Malott told me. "Not only are costs lower, they say there
is less red tape and bureaucracy."

HOLLOWING
OR ADDING VALUE?

An
active debate is underway, as happens in many countries that move from low-wage
havens to centers of higher-value design and capital provision, as to whether
Taiwan’s manufacturing sector is being "hollowed out" or this is simply
a natural progression toward becoming an upscale center that farms out low-wage
work. The question is whether enough research and development is being done
to sustain such a transition. "Taiwan’s government, universities and businesses
together spend less on R&D than IMB," Mr. Malott claims.

For
the most part Taiwan’s manufacturing companies are small to medium-sized
enterprises with little or no experience or expertise in international marketing.
Furthermore, the infrastructure of business and financial services is something
short of world-class, so it is unlikely that in the near future Taiwanese firms
can make profits exporting services as well as goods.

The
situation doesn't resemble an imminent crisis, Malott says, but the possibility
of stagnation that would be difficult to overcome for a while is quite real.
Such an outcome is more likely if the leadership is unable to muster the necessary
political will to enact reforms that would make various firms, especially banks,
more open, honest and "transparent" in their dealings and more likely to acknowledge
bad loans and other problems before they become too big to handle.

THE
TIES THAT BIND

The
outsourcing of manufacturing to the mainland is just part of an increasingly
intricate web of relationships that have developed between Taiwan and the mainland,
largely off the radar screens of international observers and reporters. Taiwan’s
Central Bank estimates Taiwan’s cumulative investment in the mainland
at between $70 and $80 billion. That would make Taiwan, as a political entity,
the largest foreign – if it is foreign – investor in mainland China.

But
that’s just the beginning of formal and informal ties across the Straits
that John Malott found striking in their extensiveness. Every day about 500,000
phone calls are exchanged through direct dialing. Marriages between mainland
women and Taiwanese managers stationed on the mainland are becoming common,
"by one estimate over 50,000." Transportation, postal services and telecommunications
are not governed by formal agreements between the two – er – political
entities. Despite that – or perhaps because of it – they are extensive
and growing.

The
National Palace Museum in Taipei hosts both visitors and curators from the mainland.
Chinese academics visit with Taiwanese think tank and universities, sometimes
for fairly extended periods. A Taiwanese religious group provided earthquake
disaster relief to the mainland. One poll showed that 25 percent of the Taiwanese
responding said they have visited the mainland. If true that would amount to
some 5 million people.

All
this is occurring while formal political discussions about possible new political
links have been suspended since 1995.

INDEPENDENCE
DUBIOUS

Many
observers believe Taiwan can’t wait to declare formal independence from
China and could do so as soon as it thinks the risk of military retaliation
is low, whether through a US guarantee or mainland lack of interest. But Malott
believes Taiwanese are split about as evenly – in about four directions
– on this issue as they seem to be on almost every other issue. Indeed,
many Taiwanese seem to be concerned that the United States, with its desire
for clarity and its aversion to ambiguity, could push Taiwan in the direction
of de facto independence before the people on the island are ready to consider
that a real option.

However
that political question plays out, cross-straits relationships are likely to
continue to grow. Taiwanese are fully capable of arguing among themselves about
who really benefits from increased investment in the mainland, but it is likely
to continue whether the Taiwanese public approves of it or not.

DOMESTIC
ISSUES DOMINATE

John
Malott, whom I have known long enough to believe he has generally good judgment
and pretty good observational skills, suggests that almost all outside observers
have fallen into the habit of viewing Chinese-Taiwanese issues from an essentially
external framework. The focus has been on foreign policy, questions about what
the United States might do if various alternative scenarios developed, military
security and official government pronouncements.

He
believes that it will be essentially domestic considerations within each country
– political, economic and social dynamics on either side of the Straits
of Taiwan – that dominate future relationships

The
fact that Taiwanese-mainland ties on the level of economic, travel, tourism
and subsidiary manufacturing interests are more extensive than most Western
observers realize, suggests that resolution of political issues could come about
in surprising or unexpected ways. It might not be strictly true that, as Frederic
Bastiat observed, when goods do not cross borders armies will. But it does seem
likely that the more extensive the economic and social ties, the greater the
deterrence – from economically and therefore politically influential elements
within each country – against future military adventures there will be.

Does
this mean that without US involvement the Chinese-Taiwanese issues will eventually
resolve themselves peacefully? Not necessarily. But it does suggest that more
extensive US involvement might not be helpful and might even precipitate unnecessary
violence or bitterness. The Chinese and Taiwanese might not work things out
perfectly, but they might have a better shot at it with minimal US meddling.
And they might find, somewhere down the road, that some sort of cultural, economic
and personal unification has already occurred and the main political question
will be whether to put a political stamp on it or not.

That's
hardly a prediction. But it might not be a bad guess.

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